USPS's Options: a $14B Annual Loss or a $2B Annual Profit

U.S. Postal Service (USPS) CFO and EVP Joseph Corbett laid out the harrowing financial stakes the agency faces now and in the coming years during the “Financial Update” panel at the National Postal Forum (NPF) in San Francisco. Essentially, he said, if the USPS is given by Congress the autonomy it needs to adapt its five-year financial plan in full, the agency will make a “modest profit” of $2 billion per year over the next five years, paying its debt down by 2017. If the status quo remains, the USPS will lose $14 billion per year over the next five years.

“We're working with a precariously low level of cash and liquidity,” Corbett said, adding that the USPS has only 13 days of cash on hand. “Which isn't a lot of cash on hand. Our best projections show that we'll make it to October 15 if everything works out.” For instance, the USPS forecasts $70 billion of cash flows. If that forecast is off by 1.4%, that accounts for almost $1 billion. “One billion dollars,” Corbett said putting the figure into perspective, “is four days of operating cash for the USPS.”

To further emphasize the USPS's predicament, already in the first quarter of the 2013 fiscal year, the agency has shown a net loss of $1.3 billion. As a point of contrast, the first quarter is typically the strongest quarter for the USPS and in flush times typically showed a profit of $1 billion to $2 billion.

Congressional lock

This is, of course, chickenfeed compared to the USPS's $41 billion of losses over the past six years. While the 25% reduction of total mail volume over that time period was a factor contributing to the agency's $15 billion debt (because of reaching this limit in October 2012, the USPS can no longer borrow from the U.S. Treasury), the biggest financial hole the USPS must claw out of is the $17 billion liability it has due to its obligation to reimburse the Department of Labor for all workers' compensation benefits. “Current workers' compensations costs are $1.4 billion per year,” said Postmaster General Patrick Donahoe during his February 13 statement before the Committee of Homeland Security and Government Affairs.

Corbett added that UPS and FedEx—which together are bigger than the USPS's 500,000-plus employees—have liability costs of $2 billion.

“We're in a very deep hole and in a weak position in terms of our flexibility,” Corbett said, alluding to the fact that the agency is hamstrung by Congressional inaction. “We're a bastard child...at the moment, with our hands tied behind our back.” Without Congress's approval of any substantive restructuring, the USPS cannot enact its fiscal plan. It cannot raise rates beyond its nominal annual increase to account for inflation, which usually hovers in the 2% range. And it cannot consolidate its various healthcare and benefits plans to make them more financially viable.

That the USPS was not allowed to make its own financial decisions further hurt the agency when, in the face of rising labor costs, it went into binding arbitration with Union representatives. “We weren't happy with them,” Corbett said of the results. In three arbitrations, he explained, the arbitrator did not account for the financial health of the USPS. “They could force us to pay out at a rate we can't afford,” he said. “It could force us into bankruptcy.”

Currently, because the USPS doesn't get taxpayer funds, its only way to subsist is by offering products and services—most of which are designed to help its business clients communicate with customers; some of which, like partnering with a clothing company to launch a line of outdoor apparel, are not.

Certainly, the USPS has areas of health. The robustness of its package business made the USPS much more bullish about its revenue projections, anticipating an increase from $11.6 billion in 2012 to $12.8 billion in 2013. Corbett expects this business to grow by more than $5 billion over a five-year period.

But these gains don't mitigate the losses the USPS faces due to its obligation to pay out substantial employee benefits. In fact, it doesn't even mitigate the losses the USPS faces due to the decline of first-class mail—which is expected to be more than $6 billion over five years.

“We're replacing a very profitable first-class mail volume and dollars with package volume and dollars,” Corbett said, noting that $3 of package revenue is equal to $1 of first class mail profits. “We need to grow (package revenue) by $18 billion to keep up,” he said. “And that's highly unlikely to occur.”

The five-year quest for solvency

“We can't afford not to do this,” said Corbett of the USPS's five-year plan to purge debt by 2017. In eking out a $2 billion profit over the next five years, the agency would like to cut operational costs, totaling to $8.7 billion per year.

Corbett outlined four areas the USPS would like to restructure.

The first cost-cutting measure focuses on postal retail offices and purchasing postal products, which the USPS projects will account for $1.7 billion in savings. These measures include matching post office hours to transaction activity (less activity naturally means fewer hours of business), consolidate small post offices, which will operate at longer hours, and moving customers to so-called Village Post Offices—essentially these are “express” versions of full-service post offices catering to rural communities, and share building space with local businesses.

The USPS also plans to step up its barcoding activity to account for all mailstream revenue. “Everything needs to be barcoded, which some people are edgy about,” Corbett said. “But at the end of the day, you bring one million pieces (of mail) in, we can machine-count them, know that one million were on the manifest and one million were delivered. It's 100% revenue recognition.”

Further steps to reduce operational costs include moving customers to lower-cost channels, such as providing easier access to postal products on usps.com, as well as on third-party websites.

The second area the USPS would like to focus on for cost-cutting is processing and transportation, which the agency estimates will account for $3.1 billion in savings. On a slide deck shown by Corbett, this was described as “consolidating excess network capacity.” Practically speaking, this measure entails reducing the 417 mail processing locations the USPS currently has to less than 250 facilities by 2015.

The third area where the USPS would like to cut costs is in delivery procedures, from which the agency anticipates $2 billion in savings. This would entail reducing the number of routes, combining delivery units, and improving optimize delivery routes and mail carrier productivity by installing GPS units in delivery vehicles. “It will save an enormous amount of money and take away a lot of friction that we have with the unions,” Corbett said, explaining that the arbiter had ordered the agency to use GPS. “You use this to maximize the route and minimize the non-productive time spent on the delivery.”

The dynamic delivery service Metro Post, which Postmaster General Donahoe described in his earlier keynote, is also an area expected to push revenue into delivery operations.

“Is Metro Post the future? I don't know,” Corbett said. “We try to develop markets, get package density up, and see if they can duplicate it across the country.”

For instance, because the typical window for online purchases is between 10pm and midnight, the USPS made an arrangement with a large distributor (USPS VP of new products and innovation Gary Reblin revealed that the three companies piloting Metro Post are eBay, 1-800-Flowers, and Cheryl's Cookies) in which, when the distributor gets orders during that time frame, they send those orders to the USPS delivery unit within three to four hours of the distributor's warehouse. So far, Corbett said, the USPS has been able to deliver 40,000 packages per day in one day. “It's doing well there,” he said. “We're hoping to duplicate that sort of service by having us do the last mile for major retailers and etailers.”

The final area of cost savings Corbett outlined is the elimination of Saturday delivery service—resulting in six-day package delivery and five-day mail delivery. This is expected to account for $1.9 billion in savings.

Despite the controversy this decision has engendered, particularly among members of Congress, Corbett points out that delivery hours is the last major cost category. “There's no other way to bring those hours down,” he said, adding that this reduction of service is further justified by the severe reduction of mail volumes. “Do airlines fly empty planes?” he said. “No they don't. It's the smart thing to do in terms of your cost structure.”

Staying dry with broader reform

There are a number of broader legislative goals the USPS hopes to enact. At the broader level, it's about the USPS being able to have autonomy to make its own business decisions, independent of Congress.

First and foremost, the agency wants to fully resolve the Retiree Health Benefit (RHB) prepayment issue, which arose due to the passage of the Postal Accountability and Enhancement Act (PAEA) in 2006, and which required the USPS to make substantial payments to the U.S. Treasury to fund retiree benefits.

The USPS wants future employees to go into a defined contribution retirement plan (employees use their own money to fund these plans), as opposed to the current defined benefit plan (in which the employer pays for it).

As part of this reform, the USPS also wants a portion of its contributions to the Office of Personnel Management (OPM) for its Federal Employees Retirement System (FERS) returned, arguing that the agency has been overfunding the federal retirement plan “for decades.” In words using fewer acronyms, the USPS believes that it has put so much money into the system that it's essentially “subsidizing the rest of the federal government.”

Corbett acknowledged the concerns of U.S. representative Darrell Issa (R-California), who argues that if Congress were to return the money, because of the volatility of interest rates, the USPS's overfunding could flip to underfunding.

“That's a true statement,” Corbett said. “But for two decades it's been an overfunding situation.” He noted that if Congress were to refund the FERS money, it might look too much like a bail-out—a politically dangerous situation.

Additionally, the USPS wants to build its own medical plan, getting away from the current Federal plan, which Corbett characterized as “inefficient.” He argued that the agency can provide the same or better coverage at reduced costs.

At issue, Corbett said, is that while most retirees file a claim to Medicare, which pays a portion of the claim while the insurance company pays the rest, USPS retirees tend not to use Medicare at all.

“There's no requirement to file with Medicare,” Corbett said. “So we pay into Medicare, but our retirees don't take it out. They just charge the whole bill back to the USPS retirement plan. It's ridiculous.”

Finally, the USPS wants the right to appeal class-action claims. “All we want is the right to appeal, the way other commercial entities have,” Corbett said.

Stuck in the mud

Corbett spoke of the USPS's fiscal future with terse pragmatism borne of urgency. He didn't foresee a problem implementing many of the operational changes, with the possible exception of the five-day delivery plan, which has been heavily criticized by Senate Majority Leader Harry Reid (D-Nevada).

“There might be political impediments, but there are no legal points where someone can say as a matter of law, ‘You can't do that,'” he said. “And we haven't been buckling under political pressure, because if we do, we're stuck in the mud without any money.”

It's the broader reform around restructuring retirement and healthcare plans where Corbett was less certain. “There's been some positioning coming out,” he said. “We can't say, ‘Yes' or, ‘No' this is going to happen, but I can tell you, internally, we have not taken our foot off the pedal on this. This has to happen, unless Congress wants to start appropriating funds to the Postal Service, which I think is highly unlikely.”

He emphasized that the USPS's plan has to fall into place in its entirety for the agency to regain its solvency. “If we do everything—everything—I talked about, you get a modest profit of $2 billion a year, just enough to pay our debt down by 2017. It works, but it takes every single element of it to work.”